Measurement of Household Financial Risk with the Survey of Household Finances
AbstractIn this paper we study the determinants of financial risk of households. We estimate the probability of default of household using a probit model with two novel variables: (i) a Modified version of the Debt Service Ratio index (MDSR) and (ii) the probability of job layoff of the head of the household. Our new index allows us to include households without any transitory income in the analysis and solve the outliers’ problem underlying the standard Debt Service Ratio (DSR). The probability of layoff allows us to incorporate the uncertainty with respect to the labor status and income of the household’s head. In addition, we study the marginal probability of default for different income strata and age strata by levels of MDSR, conditional in others characteristics. We use micro-data from the Survey of Household Finances (SHF) of the Central Bank of Chile. Our estimates show that both, the MDSR and the probability of job layoff, are positively related with the probability of default. In fact, we found a monotonically increasing relationship between the probability of default and the MDSR. Our results allow us to assess the probability of default of the debt outstanding, and to project it under different scenarios.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 682.
Date of creation: Feb 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-02 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
- repec:ese:iserwp:2000-04 is not listed on IDEAS
- Umar Faruqui, 2008. "Indebtedness and the Household Financial Health: An Examination of the Canadian Debt Service Ratio Distribution," Working Papers 08-46, Bank of Canada.
- Herrala, Risto & Kauko, Karlo, 2007. "Household loan loss risk in Finland – estimations and simulations with micro data," Research Discussion Papers 5/2007, Bank of Finland.
- Georgarakos, Dimitris & Lojschova, Adriana & Ward-Warmedinger, Melanie E., 2009.
"Mortgage Indebtedness and Household Financial Distress,"
IZA Discussion Papers
4631, Institute for the Study of Labor (IZA).
- Georgarakos, Dimitris & Lojschová, Adriana & Ward-Warmedinger, Melanie, 2010. "Mortgage indebtedness and household financial distress," Working Paper Series 1156, European Central Bank.
- Robert Shimer, 2007.
"Reassessing the Ins and Outs of Unemployment,"
NBER Working Papers
13421, National Bureau of Economic Research, Inc.
- Rodrigo Alfaro & Natalia Gallardo & Roberto Stein, 2010. "The Determinants of Household Debt Defa," Working Papers Central Bank of Chile 574, Central Bank of Chile.
- Shubhasis Dey & Ramdane Djoudad & Yaz Terajima, 2008. "A Tool for Assessing Financial Vulnerabilities in the Household Sector," Bank of Canada Review, Bank of Canada, vol. 2008(Summer), pages 47-56.
- Boheim, Rene & Taylor, Mark P., 2000. "My Home Was My Castle: Evictions and Repossessions in Britain," Journal of Housing Economics, Elsevier, vol. 9(4), pages 287-319, December.
- Robert Shimer, 2008. "The Probability of Finding a Job," American Economic Review, American Economic Association, vol. 98(2), pages 268-73, May.
- DeVaney, Sharon A. & Lytton, Ruth H., 1995. "Household insolvency: A review of household debt repayment, delinquency, and bankruptcy," Financial Services Review, Elsevier, vol. 4(2), pages 137-156.
- Orla May & Merxe Tudela, 2005. "When is mortgage indebtedness a financial burden to British households? A dynamic probit approach," Bank of England working papers 277, Bank of England.
- Greninger, Sue A. & Hampton, Vickie L. & Kitt, Karrol A. & Achacoso, Joseph A., 1996. "Ratios and benchmarks for measuring the financial well-being of families and individuals," Financial Services Review, Elsevier, vol. 5(1), pages 57-70.
- Ingrid Jones & Alberto Naudon, 2009. "Dinámica Laboral y Evolución del Desempleo en Chile," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 12(3), pages 79-87, December.
- Carlos Madeira, 2014. "El Impacto del Endeudamiento y Riesgo de Desempleo en la Morosidad de las Familias Chilenas," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 17(1), pages 88-102, April.
- Jaime Ruiz-Tagle & Leidy García & Álvaro Miranda, 2013. "Proceso de Endeudamiento y Sobre Endeudamiento de los Hogares en Chile," Working Papers Central Bank of Chile 703, Central Bank of Chile.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda).
If references are entirely missing, you can add them using this form.